THE low fuel price should be a welcome present for Tiong Nam Logistics Holdings Bhd, which is celebrating its 40th anniversary this year. However, the total logistics solution provider still needs to contend with the slowdown in economic growth and muted sentiment in the property market.

Executive director Victor Ong Wei Kuan is aware of the challenges faced by Tiong Nam (fundamental: 1.1; valuation: 1.8), which was built by his family and presently has a market capitalisation of more than RM500 million. He says its 5,000-odd employees are rolling up their sleeves to increase its efficiency and customer base.

Earnings for the first nine months of the financial year ending March 31, 2015 (9MFY2015), fell 15% to RM37.33 million due to a lower contribution from its property division. That same division’s performance allowed the company to increase its three-year compound annual growth rate to 38% in FY2014 when it reported earnings of RM74.62 million or 17.75 sen a share.

Even with a cash call last year, Tiong Nam’s net debt grew to 90% of its shareholders’ funds of RM423.64 million as at Dec 31, 2014. Nevertheless, with a double-digit return on equity, it is not overly concerned and would not worry even if its net gearing reaches two times, says Ong.

He is confident that the company’s profit will continue to grow. “We are aware of the challenges ahead, but we have been through many downturns, and we were still able to grow our business.”

Ong tells The Edge that Tiong Nam intends to offer delivery services to e-commerce companies soon. He says the business is a lucrative one and it will not be a drastic change in business direction for the company.

“Faster Internet speed and more social media platforms will lead to more e-business activity in Malaysia,” says Ong, who is the son of Tiong Nam managing director Ong Yoong Nyock and executive director Yong Kwee Lian.

In fact, GD Express Carrier Bhd (Gdex) is already enjoying the fruits of the e-commerce market. RHB Research says Gdex’s client, Astro Malaysia Holdings Bhd, is “aggressively” expanding its shopping network business to achieve an annual revenue of RM500 million in three to five years.

RHB analyst Ahmad Maghfur Usman says in a recent note that Gdex enjoyed a widening earnings before interest, taxes, depreciation and amortisation (Ebitda) margin with better economies of scale. The company plans to increase its capacity by as much as 42% to 100,000 parcels a day, from between 70,000 and 80,000 now.

Although Tiong Nam is keen to venture into e-commerce, it is still conducting a feasibility study, says Ong. Currently, it provides total logistics solutions to its 5,000 customers, comprising tobacco players, electronics product manufacturers and fast-moving consumer goods providers.

When it was established 40 years ago, Tiong Nam was a small-scale cargo business delivering parcels to households. It now offers various services, including the transport of heavy items and warehousing facilities. Ong says, “We want to strengthen our cold chain business within our logistics business. As we do not have many competitors in this field, we can receive higher returns doing so.”

Tiong Nam’s logistics and warehousing business has been overtaken by its property development segment as the chief contributor to group earnings. For 9MFY2014, logistics and warehousing contributed only about one-third to the group’s pre-tax profit, while the rest came mostly from its property development segment. Revenue contribution from the former stood at 62.15%.

Fast forward to 9MFY2015 and its logistics and warehousing segment contributed 66.4% to profit before tax with a margin of 12%, up from the previous corresponding period’s 9.52%. Revenue, too, grew 22.3% to RM311.04 million and made up 72.8% of its turnover.

The company experienced the margin expansion even before the price of diesel was reduced through the managed float system in January. Ong declines to reveal how much of Tiong Nam’s total expenses comes from fuel, but confirms that the lower price will help widen its profit margins going forward.

“[Lower diesel prices] mean lower costs for us, but in the past, when [fuel prices were higher], it did not really affect us. We try to improve our efficiency, and we pass some of our costs to our customers,” he says.

Tiong Nam’s net profit of RM74.62 million or 17.75 sen per share for FY2014 was more than four times the RM17.35 million it reported in the previous year. Revenue jumped 57% to RM533.13 million. The strong year-on-year increase resulted in Tiong Nam becoming one of the best performers in 2013 — its share price grew 277.94% that year.

While its logistics and warehousing business has been growing at a double-digit pace, Ong acknowledges that its property segment is slowing down. Even though demand for industrial properties has not weakened as much as that for residential and commercial properties, he says Tiong Nam has no plans to launch new projects in the near future.

 “We still have two to three years’ worth of projects to sustain us for the time being,” Ong says, adding that the 100-odd acres the company has in its possession do not necessarily have to be used for property development as continuing demand from its logistics customers may lead to it building more warehouses.

“We have taken into account the softer economic growth projections. However, we are still seeing high demand from our logistics and warehousing clients,” he says.

Although Tiong Nam is growing its warehousing space, Ong refutes reports that came out three years ago that said the group was going to spin off its property assets into a real estate investment trust. He says, “It was a proposal tabled by bankers, but we didn’t think it would really deliver value to our shareholders.”

Tiong Nam’s share price of RM1.22 last Thursday was 7.53 times its 12-month trailing earnings per share of 16.2 sen, compared with other logistics players’ double-digit price-earnings ratios.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on March 2 - 8, 2015.

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